The ongoing saga of Puerto Rico’s debt problems blew up a lot bigger last week, as the U.S. territory defaulted on an additional $174 million of debt payments to its creditors on January 4, 2016, exactly five months after Puerto Rico’s government defaulted on its debt for the first time ever since the territory become part of the U.S. in 1898. The New York Times reports:

Puerto Rico defaulted on about $174 million of debt payments on Monday, as planned, stripping cash away from its lower-ranked creditors so that higher-ranked creditors could be paid in full.

Alejandro García Padilla, Puerto Rico’s governor, defended the default as best he could on Monday in an appearance on CNBC, saying, “It’s very simple. We don’t have money to pay.”

The default came just a little over two weeks after Puerto Rico’s government paid $120 million in bonuses to the employees of the territorial government.

But now, the way that Puerto Rico’s elected officials stiffed some of its bondholders just one month ago has run afoul of the insurance companies who backed the territory’s debt. Finance blog Zero Hedge explains how Puerto Rico avoided defaulting on the General Obligation (GO) portion of the debt payments it needed to make at that time, choosing instead to stick the holders of bonds issued by the Puerto Rico Infrastructure Financing Authority (Prifa) with all the losses:

On December 1, Puerto Rico governor Alejandro Garcia Padilla was staring down a $354 million debt payment he couldn’t make.

If the commonwealth defaulted on the GO portion, a cascade of messy litigation would follow and the island’s reputation with creditors would suffer irreparable harm.

That afternoon, on the heels of a visit to Capitol Hill where the governor attempted to explain to Congress why Puerto Rico should be allowed to take advantage of bankruptcy laws, the island made the payment, avoiding default.

Padilla “found” the money by using what we called an “absurd” revenue clawback mechanism.

Essentially, Puerto Rico diverted money earmarked for non-GO creditors and used it to pay the island’s GO bonds. As you can imagine, the bond insurers for the debt involved in the clawback were not happy. Ambac, for instance, called the clawback “illegal” and claimed that Padilla actually began siphoning funds well before the December 1 payment, a charge the governor denied.

On January 1, Puerto Rico defaulted on some $36 million in Prifa bonds.

Now, Ambac, along with Assured Guaranty, are suing. “Insurance companies that guarantee Puerto Rico municipal debt filed a lawsuit challenging the commonwealth’s decision to divert revenue designated for some bonds to pay other creditors,” Bloomberg reports, adding that the monolines “said the clawback of revenue pledged to bond issues violates the U.S. Constitution by interfering with debt-holders’ contractual rights.”

What does that mean? It means a long, costly legal battle royale for all parties involved. Reuters outlines the plaintiff’s case:

The lawsuit is an opening salvo in what could be a long and expensive court fight over Puerto Rico’s efforts to restructure its debt. The island lacks access to U.S. bankruptcy protections, and creditors have resisted voluntary concessions, making for a messy and unpredictable path to restructuring….

The plaintiffs argue clawback authority applies only when there is no other money available to pay debt, which Puerto Rico has not proven is the case. The clawbacks “substantially and unjustifiably impair … contractual rights,” the insurers alleged.

They also said Puerto Rico is wrongfully using clawbacks to fund government services, and is diverting bondholders’ collateral in violation of the Takings and Due Process clauses of the U.S. constitution.

Together, Ambac Financial and Assured Guaranty insure $2.6 billion of debt issued by the territory’s government entities whose bondholders Puerto Rico’s leaders have selected to be the first in line to take losses from the government’s default on its debt.

All this action will play out in U.S. courts. This is what a sovereign debt default in the United States looks like.